I’ve posted Entry #70 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Do Demographic Changes Affect Stock Returns?
Juicy Excerpt: Demand for stocks doesn’t matter, according to the VII Model. Demand of course has a temporary effect. When lots of investors want to own lots of stocks, that pushes prices upward. But it is a key precept of this model that, while prices often do not reflect the economic realities in the short term, they always do in the long term (that is, after the passage of 10 years or so of time). Demographic changes could push stock prices up hard or down hard for a time. But demographic changes do not alone determine true value. To the extent that demographic effects only affect the demand for stocks and do not affect the productivity of the economy, demographics have an effect only in the short term.
Demographics are like a lot of other potential factors. Some suggest watching inflation rates to know where stock prices are headed. Some say to watch political developments. Some say to watch consumer confidence. The Valuation-Informed Indexer views all of these as temporary effects. They can affect perceptions of value. But generally they do not signal permanent changes in stock values. The U.S. economy has been sufficiently productive to support a 6.5 percent real annual return for as far back as we have records. So long as that remains so, you don’t need to be concerned about any non-valuation factors if you are investing for the long run.